WW is a quoted manufacturing company. The Finance Director has addressed the shareholders during WW's annual general meeting-She has told the shareholders that WW raised equity during the year and used the funds to repay a large loan that was maturing, thereby reducing WW's gearing ratio At the conclusion of the Finance Director's speech one of the shareholders complained that it had been foolish for WW to have used equity to repay debt The shareholder argued that the Modigliani and Miller model (with tax) offers proof that debt is cheaper than equity when companies pay tax on their profits.
Which THREE arguments could the Finance Director have used in response to the shareholder?

• A.WW was approaching a debt covenant limit and it was therefore important to reduce gearing.
• B.The Modigliani and Miller model would only be valid in practice if WW's shareholders were aware of the model and believed in its validity
• C.Reducing the gearing ratio has reduced the financial risk of WW which will benefit shareholders
• D.A lower gearing ratio will result in an increase in the value of the company
• E.A lower gearing ratio creates greater flexibility for WW in the future
• F.The shareholder was confusing the cost of capital with shareholder wealth

Comment: *

Name: *

Email: *

Verification: *

AA is considering changing its capital structure. The following information is currently relevant to AA:

The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.

• A.The cost of debt will increase above 4%
• B.The cost of equity will decrease below 10%
• C.The WACC will decrease below 7.6%
• D.The cost of debt remain unchanged at 4%
• E.The WACC increase above 7.6
• F.The cost of equity will increase above 10%

Comment: *

Name: *

Email: *

Verification: *

Company E is a listed company. Its directors are valuing a smaller listed company, Company F, as a possible acquisition.
The two companies operate in the same markets and have the same business risk.
Relevant data on the two companies is as follows:

Both companies are wholly equity financed and both pay corporate tax at 30%.
The directors of Company E believe they can "bootstrap" Company F's earnings to improve performance.
Calculate the maximum price that Company E should offer to Company F's shareholders to acquire the company.
Give your answer to the nearest $million.

• A.1,890
• B.2,700
• C.3,150
• D.4,500

Comment: *

Name: *

Email: *

Verification: *

A company is planning to issue a 5 year $100 million bond at a fixed rate of 6%.
It is also considering whether or not to enter into a 10 year $100 million swap to receive 5% fixed and pay Libor + 1% once a year.
The company predicts that Libor will be 4% over the life of the 5 years.
What is the impact of the swap on the company's annual interest cost assuming that the Libor prediction is correct?

• A.Increase by 1%.
• B.Fall by 2%.
• C.Remain the same.
• D.Fall by 1%.

Comment: *

Name: *

Email: *

Verification: *

The Board of Directors of Company T is considering a rights issue to fund a new investment opportunity which has a zero NPV.
The Board of Directors wishes to explain to shareholders what the theoretical impact on their wealth will be as a result of different possible actions during the rights issue.
Which THREE of the following statements in respect of theoretical shareholder wealth are true?

• A.If the shareholders allow their rights to lapse (do nothing) there will be no impact on their wealth.
• B.If shareholders sell their entire rights entitlement there will be no impact on their wealth.
• C.If the shareholders only partially exercise their rights and allow the remainder to lapse there will be no impact on their wealth.
• D.If shareholders partially exercise their rights and sell the remaining rights entitlement there will be no impact on their wealth.
• E.If shareholders exercise their full rights there will be no impact on their wealth.

Comment: *

Name: *

Email: *

Verification: *